Innovation with Integrity

Sunday, July 12, 2015

Most television shows today open with either a sex scene or a corpse. Since sex is hard to write, I'll open with a corpse, or at least part of one. By my recent auto purchase, I have saved an estimated 0.002 life.

Slimming Down

On a Sunday evening almost two years ago,

I placed an ad on Craigslist to sell my 2000 Lincoln Navigator. The next Friday I met a couple at Yogurt Mountain and sold it. I woke up Saturday morning without a car. I emailed all the local Ford dealerships, and by 10:30 had a dozen offers, each successively lower. When they converged, I rented a car to drive to Charlotte to pick up my new car. I was at the dealership no more than 30 minutes to sign paperwork and take it for a quick drive.

In two years I have driven 20,000 miles, and average 80 mpg. My Navigator averaged 14 mpg. In my 20,000 miles, I have used 250 gallons of gas and 2800 kWh of electricity, compared to 1,429 gallons of gas I would have used in the Navigator. In dollars, this translates to $1,150 actual versus $4,650 that I would have spent with the Navigator.

On the surface, it looks like this:

Units

Navigator

C-Max

%
savings

mpg

14

80

gal/20000 m

gallons

1430

250

83%

kWh/20000mi

kWh

0

2800

Fuel $

$

$4,650

$1,150

75%

So that's nice, right? I've saved $3,500 in two years, or about $150/month in fuel. But what else?

Quantifying Pollution

Many of you know I've spent time in

China over the last couple years, which has made me very conscious of pollution. I'll cover this in another blog post including their massive efforts to reduce pollution. This picture was taken in January, which is representative of all of the 20-odd days and 10 or so cities I've visited in China this year.

I used EPA and DOE estimates of the emissions from both power plants and passenger cars to estimate the emissions saved from switching vehicles, summarized as:

Column1

Units

Navigator

C-Max

%
savings

CO2

g

12,683,486

3,857,841

70%

VOC

g

35,599

6,230

83%

CO

g

323,629

56,635

83%

Nox

g

23,859

5,452

77%

PM10

g

151

172

-14%

PM2.5

g

141

25

83%

million m3 polluted

m3

483

192

60%

I was surprised to have saved 9 tons of CO2 from hitting our environment. But some of you ostriches don't believe in global warming. (I do, I just don't know that its bad.)

The bottom line is the most striking, which I'll explain: Many people measure air quality by the PM2.5 index. Here in Greenville, we live with an index around 15 - 20, which means 15 - 20 micrograms of particles less than 2.5 microns per square meter of air. In Beijing or Shenzhen, the number ranges from 100 - 300. For those of us old enough to remember indoor smoking--the level inside a smoky bar is around 200. Most people draw the line for health hazards at 50, so that's what I did.

I have reduced our polluted atmosphere by 300 million cubic meters.

Where is the Corpse? or The Public Good Side of Things

Using various articles in Wikipedia, I determined that since September 11, 2001, the US has spent $2.3 trillion (including future medical and disability expenses) and 244,000 lives (military and civilian, US and foreign violent deaths) in wars in the Middle East to secure the purchase of 10 billion barrels of oil, which converts to 200 billion gallons of gasoline.

Having saved 1200 gallons of gasoline (it really is a lot), the proportion that I have reduced imports by is 0.000000006, or 6 gallons in 1 billion. Annually, it's a little higher, almost 50 gallons in 1 billion.

If these things scaled linearly (I know they don't), then I would have saved about 0.002 lives by my reduced oil consumption so far. Every 500 people who joined me in this choice would save a life every two years.

The part that surprised me was that spending $2.3 trillion for 194 billion gallons of gasoline amounts to a $12/gallon subsidy of the oil industry. So, again, if these things scale linearly, then I've saved the government $14,350. The $4,000 tax credit I received has already paid back 3.5 times. And it grows every year.

If 20 million people switched from gas guzzling land yachts to plug in micro-SUVs, we would eliminate our need for Persian Gulf oil, save $2 trillion on the cost of the next war and 200,000 lives. Unless the next war is bigger.

Where is the Downside?

Forget my faulty logic--I get it. Here is a summary of the upside:

I'm saving $1,800 per year in fuel costs.

I get to drive a peppy little car that makes absolutely no sound when driving in electric mode. Truthfully, tailpipes are so 20th century.

I'm not polluting 240 million cubic meters of atmosphere every year.

All of that is a certain, indisputable fact. And if you believe that eliminating our purchase of Persian Gulf oil will reduce our need to spend a couple trillion dollars to kill a couple hundred thousand people in the next decade, then the savings there are about 5-fold more important.

Wednesday, August 21, 2013

The invitation came in early this year to make a presentation at a battery conference in Isreal, when my travel schedule was not so crowded as it later became. The conference also was sponsored by Schmuel De-Leon, who is one of the best connected consultants in the industry. I jumped at it.

For those of you pressed for time, I can save you reading the rest of the blog post. My impression of Israel, and especially entrepreneurship in Israel, is very similar to my impression of entrepreneurship in California, except that everyone is Jewish.

Travel

I didn't plan to drive, as I normally don't when I don't know the alphabet.
But in Israel, everything except the most local road signs is written in Hebrew, Arabic and English. Also, my iPhone knew exactly where everything was. Next time I will rent a car.

Getting through customs at the airport was far easier than it is in the US. I breezed through, caught a cab and was at my hotel in a small beach town just north of Tel Aviv within an hour of landing. The Mediterranean was gorgeous, warm, and had beaches and resort restaurants and beach volleyball courts just as you would expect in Santa Barbara or San Diego.

The Conference

The conference started the next day with several talks detailing the support the Israeli government has for start ups. They are perhaps a bit smarter than we are, not trying to pick winners themselves, but rather providing matching funds for angel investors that the angels can buy out later if they like. There is no downside for the company, but a large upside for the angel investors. And they let the business people pick the most promising companies to invest in, rather than the bureaucrats. Not that I have any opinions.

The next part was speed dating, so I got to meet maybe 15-20 Israeli start ups in a four or five hour period. This was great, and I was very, very impressed with both the technical excellence (far better than my own developing expertise) and the innovativeness of the startups. A couple examples:Cellergy: Cellergy is making aqueous

supercapacitors for use in electronics and energy storage. They are clean, green, and cheap, and can go into anything. Most of the rest of the world is using organic electrolytes that are messy and burn, but do have higher energy density. Their execution is excellent, and their products have appeal.

Better Place: Okay, so Better Place announced their bankruptcy just before the meeting, and it was the chatter while we were there. But they dared greatly, and it's better to dare greatly and fail, than to live in the...well we all know the Teddy Roosevelt quote. Better Place was going to have us all swapping drained batteries from our EVs for fully charged ones, ready to go in a few minutes. The world isn't ready for it yet, but I expect we'll be doing it before the next couple decades are over.

Electric Fuel, Tadiran: Both lithium battery companies, one established, the other new, both with high levels of technical excellence.

Entrepreneurship in Israel

Entrepreneurship in Israel is unique in several ways, but I especially noticed a unique culture that I thought was especially conducive to entrepreneurship. Here are my impressions:

Comradery: I'm not sure if it's their God, common military experience, shared history, or having half a billion people live nearby who want to kill you, but the Israelis have a comradery that I would liken to being in an alumni association of an elite academic institution. For one Israeli, any other Israeli is immediately a friend in a way that the rest of us folks cannot understand. I could see it very clearly, and as welcoming as they all were to me, I was on the outside. I harbor no resentment, but perhaps a little jealousy. What they share is real, and palpable.

Argumentative: They were also naturally argumentative, or we refined Southerners would say so (snicker!). It was a friendly confrontational aggression--questioning, refining, criticizing, suggesting. Again, I see this as good--every entrepreneurial venture seeks to improve, and without constant refinement, will grow stale.

Improvising: In my discussions, everyone was suggesting new things to do, new ways to try to do what we were doing. Most of the suggestions were quick-and-dirty, get the most information from the smallest test, suggestions. They would never throw $3 billion at a few choice players in the battery industry to see if it sticks. Instead, they would do 3 million tests that each cost $1 thousand, knowing that many, many many of them would come together to create something.

Player-coach: Here in the US, we have professional managers, who brag about not being able to do anything but lead. In Israel, I saw three star generals talking about how heavy the cells were, and if you could change them out with one hand or two, and how to design the handles so it only required three fingers and one pivot. There were not professional managers, but everyone was a player-coach. This, of course, is a prerequisite of entrepreneurship, where there simply isn't room for the professional manager who fills a seat and everyone's inboxes, and little else.

A Personal Story From My Visit

After a few emails, Pastor Afif Saba agreed to meet me at Yardenit to baptize me. Pastor Saba had planted an evangelical church in Nazareth. My tour bus stopped there at 3pm. Young ten year old Chloe was the first person who agreed to be baptized with me, but she was soon joined by her six year old sister Lily and her mother Fiona, while husband/father Andrew was to man the cameras. I couldn't have been happier than to be joined by three new baptism sisters on this special day.

If you leave out the spiritual nature, Yardenit is little more than a large gift shop on the side of the river, with a locker room to change in and conveniently chained off areas to hold baptisms. The "river" would pass for a large creek in the mountains of North Carolina, with clear green water and a large number of fish, too small to eat but maybe fun to catch. I connected immediately with Pastor Saba, and we quickly realized that, while my baptism was real and special to me, the energy of his teaching and singing was best directed at the children. His deep voice resonated as he first read some verses to us, and then unreservedly sang a few old hymns as we entered the water.

The water was cool, as you can see in the video--but there was something else, too. The fish. When the singing was over, and Pastor Saba pulled me out into the water to be baptized, the fish joined me, and as we prayed together, they began to peck at my legs. It's hard to describe the feeling--stronger than a tickle, and nothing like anything I'd felt in this world, but definitely just fish, pecking at my leg hairs. Not just once or twice, but constantly, dozens of them, as if I were fish food, and they had all come to gently feed. Or, as I felt at the time, they were kissing me, over and over, gently touching their lips to my legs again and again. I felt as if the fish were delivering God's message, that I too was his son, and He was well pleased with me--not in the same way as Christ--but that I was entering the family of Christ, and the fish were welcoming me, even as Pastor Saba asked me the ritual questions of the Gospel. I came out feeling confirmed, feeling welcomed.

Am I a different person now that I have been baptized? I have always recognized my infant baptism, and so have considered myself a Christian for as long as I can remember understanding the question. Is there a change? I would say no, that the decision to get into the water with Pastor Saba and my three baptism sister did not change me--except for the fish. They touched me, they connected me with something that wasn't there before. It is as if an umbilical cord that I knew before only intellectually has now become solid, unbreakable, unquestionable, undoubtable. Is life easier? Is sin gone? No--the same hardships are here, in this fallen world that we live in. But those fish changed me, and I will never forget them.

Friday, July 26, 2013

I just returned from nine days in China, and nothing was as expected. Since I was so surprised by almost everything, I thought I'd share my perspective.

Recent Changes: The first thing I noticed was how recently everything has happened. The numbers are staggering, and the buildings show that it is true, at least in plan.
Nothing was more striking than a film shown at the "bottle opener" building that compared the growth of the New York, Tokyo and Shanghai skylines over the last century. New York and Tokyo were both basically done in 1950 (NY) and 1960 (Tokyo), while Shanghai was still a big farm in 1995. Here it is today, with the highest observation deck and another record-breaking building under works that has already surpassed it. So far, about 500 million Chinese people have moved from the countryside to urban areas in the last 30 years, and they are starting a plan to move another 250 million in the next 12 years.

Cranes & Smog: I had heard that a lot of building was going on,
but this was beyond incredible. Point your camera in any direction, from almost anywhere, and on the horizon were cranes. I flew into Shanghai, and around Shanghai the air was like Los Angeles--quite stinky to my Appalachian Mountain lungs, but tolerable and not unexpected. When I landed in Beijing a few days later, though, things changed. As you can see--there are cranes--but you can barely see them though they are only a few miles away. And a twist of irony--all the cabs I rode in were powered by natural gas, something that won't happen here for 10 years.

Pizza Hut: I had lunch at Pizza Hut.

Fed three of us a five course meal with wine and soft drinks for about $30. For $100/night, I stayed at a high rise Marriott. Local high speed train tickets were $30-50, and I spent an hour in a cab for $11. In 1982, the RMB was worth about $0.60. Now it is worth about $0.15. It hit a low about 10 years ago at $0.09, and has been increasing ever since. This is artificially low, and it makes it easy to export and hard to import. I may do an exchange rate blog later, but for now its enough to know that everything made there is cheap, and everything made outside China is expensive. And it's artificial. But China plans to change from exports to internal consumption (thus the migration) as a growth driver, and so the rate will change over the next dozen years in the right direction for US exports. Once they have the money to consume, they will want things made
elsewhere as well. And be able to travel abroad, which the middle class cannot now afford to do.

People: I found the Chinese to be a gentle, gracious and humble people.

In all cases--even when there was likely to be no future business relationship--they treated me as an honored guest. Though I have had Chinese friends for over twenty years, I hadn't appreciated the stark difference in cultures until I visited. The emphasis on family, on durability, on relationships, was far different from business in the United States, where the emphasis is on transactions, on contracts, on money. They have a patience we do not have. This suited me well on this trip, because I was going solely to build relationships, to understand the opportunities, to get the lay of the land so that later, when we are ready to really do business in China, we have some idea of what is in front of us.

Entrepreneurship Then: I had the opportunity to meet several Chinese entrepreneurs who now ran large businesses (most >$100 million, 20 years old, and usually 100% owned by the founder). In each case, they had found something that was ready to manufacture, but not available locally, and so they made it and sold it to local companies, who then integrated it into the parts and pieces used to make the items we buy from China. These were amazing individuals, who had been on the front edge of a wave that has been running now for 20 years. They were not exporters, but rather selling the picks and shovels to the miners (exporters). I did not meet any rich exporters, who I believe get squeezed by their customers (think Walmart).

Entrepreneurship Now: I also had the opportunity to meet with several startups that are in the early stages. There are a lot of parallels between entrepreneurship in China and in South Carolina. Most startups do not use their own home-grown technology but rather, if they have technology, look to acquire it from someone or license it from another company or university. However, they are developing state-of-the-art products, jealously protect their technology and are quick to point out where they are the best. I saw battery energy densities that rival the best in the US, made through technology licensed from Japan. (Similar US companies license technology from Korea.)

The capabilities and the potential of the country are astounding, and the pace at which they are realizing them is breathtaking. How it matures is anyone's guess, but we are in the middle of the S-curve, and so the next decade or so is assured to continue the same trajectory. There is no question that there are challenges, and pollution is one of them, but the capability and spirit of the Chinese people is enough for the task.

A Closing Story: I was warned by a business associate that my usual practice of wearing a cross on my lapel may not be well received in China. Having checked with a few other associates, I decided to leave it on anyway and risk being run out of town by the Communist Party. It turned out it was too hot to wear a jacket anyway, so the cross sat in my suitcase or closet for the entire trip. But rather than suppress or degrade my faith, several of my hosts had researched my background and commented on it, and one even offered to have my book translated into Chinese and help me publish it, where it could affect many young people. I was asked on my next trip to speak to students and to entrepreneurs. I was humbled by this show of openness to someone who is clearly a Christian (capitalist) entrepreneur, something that would stereotypically be rejected in China. Rather, this person, was offering to hold me up as a role model student, scientist, entrepreneur, and someone with strong faith. I told him I would be pleased, and left the country knowing that the heart and soul of the Chinese people were bringing forward a new China which was willing to learn from many different perspectives.

Saturday, June 22, 2013

I've been reading a biography of William Wilberforce, and I've been amazed at how he progressed from a spoiled, partying rich kid to a sickly man with true purpose. His quote says it all, "God Almighty has set before me two great objects: the suppression of the slave trade and the reformation of manners." (By "manners" he meant "morals.")

During his 20 year fight to end the slave trade, he was frustrated on many levels and met defeat after defeat after defeat in votes in Britain's House of Commons. God gave him a purpose, and the resolve to achieve it, but did not make it easy--ending a great evil is never easy. Along the way, Wilberforce gathered many friends, and left many behind, choosing as his companions people of like mind and like morals. Rather than take anyone who would help, he chose those who really believed in what he was doing, who would continue the fight if his health failed, for whom eliminating the slave trade was more important than any of the participants. He left behind those who would support only because it was fashionable or popular.

In the same way, when seeking significant investors for a startup, the investor should be chosen because they have a real belief in the purpose of the company--advancing a new material, new software, new device--and this real belief is evidenced in their other investments and in the skills of their team. Investors who really believe in your company's purpose will not saddle the company with onerous terms that will otherwise make it difficult for the company to survive, to succeed, and to thrive.

Here are some terms that will not be requested by investors who have as their purpose the success of the company. Anyone who insists on them should be left behind. (Sometimes the true test of a leader is not what they do, but what they choose not to do.)

Participating preferred stock is stock that returns the initial capital and then also converts to common, allowing the investors to participate in the common portion of the exit. The problem is that immediately after closing, the value of the stock has appreciated to more than the value of the cash input into the company. For instance, if $5 million is used to buy 33% of the company, the value of the participating preferred stock post closing is not $5 million, but rather $8.3 million. The investors have "stolen" $3.3 million of the value that was created before their purchase. Anything that does not share the value of the company fairly is a show-stopper.

Often requested by strategic investors, a right of first refusal (ROFR) allows them to take any purchase terms offered to the company by a third party. They will argue that the reason for their investment is so they can purchase the company later--and this is not to be discouraged. However, you want to make sure a market price is paid, and the only way is to have competition. The practical side is that, with a ROFR in place, most potential purchasers will not go to the trouble of due diligence to make an offer that could be taken from them at the last minute, and so the ROFR serves to submarine the final exit price. There are other, better ways to negotiate an exit or a purchase by a partner, including a call option with a 3rd party determined or negotiated price, and a short, pre-determined window of opportunity. Anything that would serve to minimize the exit value is a show-stopper.

Full ratchet anti dilution rights allow the investor to re-price their investment in any subsequent down-round. The primary problem with full ratchet anti dilution is it allows the possibility that in the future the founders stock is worth nothing, if the down-round is severe enough. This "protection" actually gives the investors an incentive to encourage down-rounds in the future (which would increase their number of shares of ownership), and so serves to put the investors and the management at cross purposes--the investors want to submarine the future value of the company (pre-exit), while the management wants to increase the value in future rounds. Anything that causes the investors to want to submarine the value is a show-stopper.

A put option is the right for an investor to "put" the shares back to the company at a set price in the future. Generally they are also limited in time, and generally the price is the same as or lower than the price paid for the stock. The problem is that the only time they would be put back to the company is if the company is perceived to be worth less than the option, which means it is likely going to have difficulty raising money and the Put Option will put the company into financial difficulty. The option can be used as a takeover mechanism for a company that may have great value based on its intellectual property, but not be in a strong cash position. (The put option would have the effect of creating debt, which is superior to all other equity, and could be used to force an involuntary bankruptcy in which the put option holder gains more, most, or even all of the equity in the company.) Anything that can be twisted into a takeover mechanism is a show-stopper.

Choosing a major investor is like choosing a spouse, a graduate school advisor, an employer, or a business partner. If done wisely, it can mean success to even a mediocre company. If done poorly, it can mean failure of the company, or at least financial failure to the founders. Among other things, the terms a company proposes can be used to understand their true motivation. This does not mean that you immediately reject any company that proposes these types of terms--it is common for a strategic to request a ROFR--but rather, after a measured discussion, if they will not give in or change the terms to something that allows a win-win, then walk away and search for an investor who has the long term goal to make the company a success for all of its owners.

Wednesday, May 22, 2013

"Before you left, I had never met anyone who had started his own company," Jianli told me at lunch the other day. When we hired him in the early 2000s, he was a brilliant polymer chemist, albeit one who knew very little about business. So, having seen me do it, he quit his job and enrolled in Duke's business school and got his MBA, and while in school started the company that he now runs.

His company does two things. The first is to shuttle thousands of students and teachers back and forth between the US and China in exchange programs, helping students learn another culture, and helping teachers learn to teach Chinese and English better as foreign languages. The other arm of his business caters to wealthy Chinese individuals, helping them to invest into privately held US companies and also to get green cards and move their families over here.

I remember my first trip overseas, in graduate school. My Pop-Tarts-and-Pepsi breakfast gave way to a croissant, a pain au chocolat, and a juice d'orange, in which the cold oranges were sliced and juiced only after I ordered. How can a chocolate Pop Tart compare to that wonderful strip of nirvana in each pain au chocolat? It can't. My "hotel room" had no bathroom, now shower, only a sink and an interesting piece of plumbing that sat on the floor and had hot and cold running water. After my six week stay, I returned with slightly better French grammar, a real appreciation for wine, and first hand knowledge that a bidet is for washing your hair only in the most desperate of circumstances.

The change that small trip to the French Alps had on a young man from the North Carolina Appalachians is difficult to describe, but I never looked at the world in the same way, and always appreciate different perspectives, different backgrounds, different cultures. To this day I love to travel, except the part about leaving loved ones behind.

So Jianli, who had been a brilliant but unhappy chemist, has become a sophisticated international business man who is touching the lives of thousands of students and, through teachers, of thousands and perhaps eventually millions more. This serves as a lead-in to the real reason angel investors invest...

Impact

Most angel investors have tasted the nectar of having a positive impact on other people, and found it so seductive that they weave it into everything they do, from how they tip their waiters to how they invest their money. Once an investor trusts you and your company, once he knows that the financial plan of the company and of the investment are sound and fair, he still will not invest, unless he is certain that by investing in your company, in you, he will also have a positive impact on other people. Without the impact, it is just another investment, just another bet, and there are safer ones around every corner.

I believe the impact comes in three ways:

Personal Impact on You: When an angel investor invests her money in a startup, she also invests her time, and she wants to believe that her presence, her knowledge, her experience can have a positive impact on you and your business, and also on the probability of your company's success, and on your ability to be a positive influence on others.

Personal Impact on Others: The investor must believe in you, and believe that by supporting you, he is enabling you to have a personal impact on your employees, on your customers, your suppliers, and even your other investors.

Global Impact: Beyond the personal influence and impact that they and you can have, they want to know that your product, your company will have an impact on a global scale. People measure this differently, and for some a great computer game is enough impact, but for others they want to save the world by reducing CO2 emissions, or helping to bring world peace, or to stop certain diseases.

It is easy for me to become overwhelmed at this point, that people put such faith in me when they invest, and it is only through the confluence of all three reasons for angel investing that it could possibly make sense. The organization has to be trustworthy to its very core. The transaction and the business have to make financial sense in every measure. And there has to be the real opportunity to have a positive impact on the company, those who do business with the company, and on the world. Only then does angel investing make sense, and, in my experience at least, that is an accurate description of what angel investors will part with their money for. They have to trust you enough to give you their money to solve their problems. For them, who are usually very successful, the biggest problem they have is how they can share that success in a meaningful way.

I hope to do business with Jianli, and don't yet know what form it will take. That he gives me credit as an inspiration for choosing the path that led him where he is can be humbling, but that inspiration was followed by a lot of perspiration, and the perspiration is how he got there. He should be quite proud. And if there is any way that I can help him to increase the impact he is having, I will do it.

Thursday, April 18, 2013

Through the law suits I've been involved in over the last couple years, I have become privy to documents that I otherwise would not likely see. In them I've seen what people--many of them investors--have written about me when they didn't think I would see it. In some cases it is humbling, in others sobering.

At the end of the day, I am reminded that investing in a startup company is a financial transaction. Yes, they must believe in you. Yes, they must think that your technology hung the moon. Yes, the team, and the market, and the product all have to be perfect. But in addition, the numbers have to line up. Here are some very practical tips that, if there were not so much hanging on them, would otherwise be quite boring.

Market

The market has to be big and growing. At the end of the funnel, after everything is eliminated that isn't immediately accessible, it should still be at least a billion dollars within five years. Fast growth would be near 20% annually, and really you shouldn't consider anything that is growing less than 10-12% annually, unless it is really big and there is a huge differentiation.

Margin

Worst case near term margins for a startup product need to be 50%. Large volume, distant-case gross margins should be in the 60-80% range. Higher than that, and the price should be lowered to gain market share (assuming some elasticity). Lower than that, and high value niches willing to pay a premium need to be found (and the market size reduced accordingly). (Business professors and textbook authors who have never had to make payroll may not advise this pricing, and I encourage you to listen to them if you also have the luxury of not having to make payroll.)

Valuation

There are a thousand ways to value your business, very few of which have any meaning. Here are a couple:

Discounted cash flows of future revenues: These work fine for established businesses with modest incremental changes every year. If revenues are going to grow 4% next year, use this method. If they are "going" to grow 40%, or 400%, then this method is meaningless. Anything can happen and trying to account for the risk with huge discount rates is a nice mathematical exercise, but nothing more.

Net present value of a future buy-out: Again, if business is growing 4% for the next five years, these can be relied upon. For fast growing businesses, the connection between the model and what is actually going to happen is not solid enough, and again applying high discount rates increases the uncertainty of the model to the point where the uncertainty is higher than the value.

(Remember, you are reading the blog of an experimental physicist, not a business professor. When the uncertainty is larger than the value measured, the value itself becomes meaningless. If you are trying to estimate the value of a buy-out in ten years and don't know whether to apply a 15%, 25% or 50% discount rate, I can assure you the uncertainty is more than the value.)

You can pay $25-50,000 for someone to do a fancy valuation of your business based on one of these meaningless bits of calculus. You could also spend $50 on EZNumbers (www.eznumbers.com) and do it yourself. Doing it yourself, you will find how easily an assumption can be changed by a smidge, and the "value" of your company increased by $50 million.

A calculator that has a firm foot in reality is this one, if used with sober assessments: http://www.caycon.com/valuation.php Using this for Dreamweaver, I get a valuation of $7-8 million, and $10-13 million for a slightly more aggressive assumptions.

One that gives meaningless high valuations based with no care to the dynamics of the marketplace is this one: https://www.equitynet.com/crowdfunding-tools/startup-valuation-calculator.aspx With it, Dreamweaver has a classroom-defensible valuation of over $35 million. (For those of you who do not know, Dreamweaver is at the cusp of revenues with a developed, producable, patented product portfolio, but otherwise still a startup.)

Some rules of thumb for an advanced materials startup:

Keep it in single digits for pre-revenue companies. If the value gets above $10 million before significant revenues are achieved, the likelihood of a down-round becomes extraordinarily high. If the valuation stays low, there is always room to inch it up in the next round. One down-round can be far more devastating than several very marginal up-rounds.

Keep it below $5 million until there is a fully validated, fully producable product. For the same reasons, until customers are far advanced in their evaluations and the product has been made at a scale that could be commercial (even if you have aspirations for larger scale), keep the valuation below or at $5 million.

Keep it below $3 million for a technology that works in the lab, but has not yet been proven with customers in their applications. This again gives room for advancing the valuation based on milestones.

You'll find that these fit with the Cayman Consulting valuations, but CC takes into account several other factors.

Company Structure

Use an LLC until all of the money put in by active partners/investors has been used up. This gives them large immediate tax breaks that can offset this investment. After that, switch to a Delaware C-Corp, and use Delaware or New York state laws for as many of your contracts as you can.

Investment Structure

For the first round of Angel investment into the C-corp, use the documents at www.seriesseed.com. They are preferred shares with rights that go down the middle of the fairway, and allow you to set up the company and an investment round for under $5,000.

After that, it gets more complicated. Any group that is going to put in more than $1-2 million will want a more robust set of investment docs like those from the National Venture Capital Association. These might cost you $25,000 to put into place, or half that if there is not too much dickering. Under no circumstances take money from one of the many criminals who "demand" participating preferred shares. This is robbery in a pinstripe suit.

Only use a bridge round if you are near to closing with a large investor. I bat about 50% once we are "near to closing," and I'm told this is not out of the ordinary, so there is still a lot of risk. For these rounds, use convertible debt with a 20% discount to the valuation of the round, 10% interest, and otherwise all of the rights and privileges that will come with the new shares. Make the debt uncollectible for 2 years, with an automatic conversion after any significant investment, even if it is much smaller than the one that you are "near to closing."

Investment Size

Never take more money than you expect to spend in the next two years. It will help you develop bad habits that otherwise will be hard to get rid of. Also, never seek less than what you need for the next six months. If you do, you are ensuring that you will spend all of your time raising money, and have no chance to hit the milestones that are critically important to raising the value before the next round.

Investors

Above all else, seek investors with high integrity who understand both you and your business. I have taken investment from people who fit that description, and also from those who did not. It is difficult to remember in the frenzy of a closing, but the wrong investors can trash a perfectly good company that otherwise would succeed, and the right investors can help make valuable a company that otherwise might not get more than a few feet off the ground.

Here are some rules of thumb:

Never, ever take more than 2-3% of someone's net worth. You must confirm this in person with everyone, and watch their eyes to make sure they are not bluffing. No one who would invest more than that into a single startup is smart enough to be your business partner.

For people investing more than $250,000, meet their spouse or business partner. You want to know them and know their context. No matter their net worth, this is a serious investment, and you should be prepared to have a serious relationship with this investor. Also have your spouse or business partner meet them as well.

Seek business people: Yes, there are people with generational money who have no real idea where it came from or how to replace it when it is gone. They will not understand your business, and they are far more likely to give bad advice and insist that you take it. People who understand business may be more difficult to close, but worth the effort in the long run.

In Closing

These guidelines apply primarily to advanced materials startups seeking money from individuals. Over the course of the last nine years, I have had the privilege of meeting a great number of individuals who considered investing in one of the companies I was running, and I frankly love the dynamic, the relationships I am able to build, the advice and coaching that I get, and the genuine care and concern that (most of) these people have had for me as an individual as well as for the company they invested in. Coming through for them is a huge motivator for me--much more so than any personal wealth could be.

Thursday, March 21, 2013

A few weeks ago, I attended a talk by a consultant who teaches sales. "Sales is all about getting someone to trust you enough to give you money to solve their problems." I had heard this quote a number of times in the past, and it struck home once again.

This next series will be on raising angel funding, and some practical tips. It will not, I am afraid, be the series of blog posts that most entrepreneurs want--some magic formula that ensures angels will flock to invest. Rather, it has a few things I have learned.

First, some information on my "success." I have led angel funded startups for nine years now. During that time, my companies have raised over $10 million in angel funds, from about 60 or 70 different angels. These companies have launched five products, garnered about 60 patents and applications all over the world, built unique-to-the-world production lines on two continents, had 60 product placements, about 80 converters and distributors selling our products and had three world championships won by competitors using our products. The bad news is that the $10 million in angel funds was leveraged against about $3 million in debt and only resulted in about $4 million (so far) in revenue, though of the five products three of them are still alive, and to my knowledge sales continue to grow. Most of you who read this know that I now have nothing to do with the Innegra products, and that most of the angel capital was lost when that company was put into bankruptcy in 2011, a year after I was forced out.

Another important point is that I have never raised a dime from "angel groups," though I have made a number of presentations. I'll explain my thoughts on this in a later blog post.

Trust

Raising equity is nothing more than selling off a part of your company to gather the money to start the company.

"Sales is all about getting someone to TRUSTYOU enough to GIVE YOU MONEY to SOLVE THEIR PROBLEMS."

So how do you get someone to trust you enough? This is the part that is both very simple and extraordinarily difficult. Simply put, you do it by being trustworthy and building credibility in every aspect of your business.

I had a bookkeeper once named Janna, who was the "mother" to everyone in the company. She remembered everyone's birthday, organized our Christmas parties, cooked snacks for the guys on the line, did all the little things that made our company more like a family, and, yes, also made sure everyone got paid. I returned back from Christmas one year to find that she had hung a sign on the wall in my office. "It is what it is." Had the gift come from anyone except Janna, I would have taken it as a left-handed compliment, or perhaps even an insult. But from Janna, I am certain that it was just what it said: a statement I made all the time which was my shorthand for "I'm not going to lie or candy coat anything. Rather, these are the facts and this is how we are going to deal with them." It gathered a few snickers behind my back and even just left of center, if the distance were far enough. But between me and Janna, we know it is a cornerstone of my character: that I would rather do almost anything rather than propogate a lie.

This philosophy, this wide open transparency, has to be built into everything about the company. Here are some examples:

Accounting: I sign checks. I do not write them, or know where they are kept. I am assured that where they are kept is locked. At least two people reconcile our bank accounts every month, and two others look over the financials.

Products: We gather as much data as we possibly can, try to understand it, and use this data when presenting the product to customers or to investors. Where we don't have data, we state that we don't have data, and then tell our opinion or intuition.

Team: I get help from the best people I can, whether they be employees, consultants or business partners. Everyone knows who the team is, and we celebrate them, and new additions. It is hard for me to hide my enthusiasm about the team, because of how grateful I am for the level of talent I get to work with and the way they lift the company to new levels.

Access: Every investor has always had direct access to any member of my management team, without me present. These meetings are encouraged and have happened too often to count. I have no idea what was said in these meetings though I often ask "how did it go?" and get whatever answer they chose to give. I have also had investors watching production equipment running, observing tests, and occasionally talking to customers. This last is one that I am hesitant about, which I'll explain in my post about angel groups. In general,though, transparency forces integrity.

Accomplishments & Disappointments: Every quarter I publish a list of accomplishments and disappointments for both the Board and for investors, segregated into four areas: technology, production, sales and finance. There is good and bad every quarter, and we deal with it in board meetings and investor calls. I once had a board member who interpretted my pathological optimism as me never sharing bad news. Correcting him was easy, "I give you four pages of bad news at every board meeting," and I had a stack of paper to back it up.

Investor Calls: This is recent, but we now host investor calls every quarter where we go over financials as well as most of the other information that was discussed during the recent board meeting. These calls are recorded and hosted on a private website that every investor has access to so they can listen and re-listen at their leisure.

Candid & Vulnerable: This is important: a startup is risky, and any CEO worth his Wheaties is scared to death about certain things. When the question is asked, and it will be, you have to tell them what you are scared of, and what you are doing to mitigate the risks. Early on, I lost investors simply because I was trying to hard to sell, rather than stating the ugly facts and how we were dealing with them.

Track Record: Be honest about your track record. Mention the team's successes without bragging, and take responsibility for your failures, being certain to say what you have learned from them. I often tell the story of the demise of Innegrity to potential Dreamweaver investors, and then describe how we have structured Dreamweaver strategy from the very start to build in what we learned. I'll joke, "We're going to make a lot of mistakes, but at least it's going to be a whole new list, and not the same ones!"

There is more, but you get the gist. This has nothing to do with how to write the business plan, how to "pitch," where to meet investors and how to network...those things you can do well or poorly, but if you cannot win the trust of an investor, it just does not matter. And you cannot win the trust of an investor with a slick business plan, a well written and memorized elevator pitch, or a catchy one-pager. Rather, you win the trust of an investor by building a credible business, and this is done one brick at a time, one handshake at a time, and one data point at a time.

One last thing: Trust builds trust. There is nothing that speaks to the credibility of a company or a CEO more than having a group of people who already trust you, and who do so enough to have their own skin in the game. This especially can only really come from building a trustworthy and credible company, for otherwise those who trusted you once will start to disappear if you don't.

Another last thing: Credible and trustworthy companies sometimes fail. Never pretend they don't.

One, really final, last thing: I have made mistakes in every point given above. It is how I know them to be true--not because I am smart, but because I was once (well, several times) dumb. I, for one, do not read blogs and believe what they say, so the only way for me to learn that a hammer can smash a thumb is by getting a smashed thumb. Because of this, especially in a startup, there also has to be some level of forgiveness for mistakes built into the system. It's not that you have to be perfect in everything, or that you have to get everything right or never find out that you were wrong. It is more that you have to put being credible in front of winning a particular investment, in front of winning a particular sale to a particular customer; it is more that the means do not justify the end, and this has to be there in every decision, every email, every handshake.

I'm not perfect in this respect, and there are people who have spend a lot of time hunting down and examining my flaws, and pointing them out to me in excruciating detail. Where they have found them are areas where I have failed, where I have smashed my thumb, and so am now able to write about it. All I can do is acknowledge them, admit that I am not proud, and say, "It is what it is." And then find a way to deal with it and make sure it does not happen again.

Friday, February 8, 2013

In 1987, at 185 lbs I was perhaps the lightest pulling guard in college football. But as a wrestler and a physicist, I knew the secrets of momentum, leverage and timing and so I could generally block most of the lard-balls I faced, even though they often weighed 100 lbs more than I did. This was club ball.

Sometimes it took a few seconds to get them where I wanted, or at least to move them away from where I did not want them. We had a wonderful tailback who could read the development on the line like a top skier does a mountain, and would hold back and then scoot through even the tiniest of holes, breaking out into the secondary more often than not. I loved him.

One day at practice, there was a clean cut, tanned man wearing a Carolina Blue golf shirt watching us and taking notes. He showed up again the next day, and then again at our game on Sunday morning. The next week at practice, half our guys didn't show up, and we found out that Mack Brown, who was well on his way to his second 1-10 season at UNC, had had a mutiny among his own players and drafted the best of ours (but not me). Our tailback was gone, and so our fullback moved back, and he read the line in brail with his shoulder pads and helmet, leaving me with bruises and footprints all over my backside as I got caught between this warthog and the lard-balls over and over again.

Another Example

A little over two years ago, about the time I started this blog, I prayed and asked God to fix my company. The board had degraded into a cesspool of factions each pushing different agendas with telephone trees to their list of supporters, and secret investor meetings that everyone knew about and nobody attended but which had acrid minutes that were passed around in chain emails. The employees were still doing their best, but funding was difficult in 2010, and every potential investor could see the troubles on the board, and they were shying away.

I trusted that God was still God and had heard my prayer and would act on it when it was His will to do so. So I put one foot in front of the other and tried to do the right thing and the best things for the company, and waited.

In November 2010, I was relieved of my position.

I was without a job, was owed $70,000 in back pay and expenses, had a mortgage and small children who needed to be fed, and the company was refusing to honor my severance package. But God is God, so I put one foot in front of the other and cut back on everything except our donations to our church and some local charities, and began to think about what I might do after Innegrity.

Within a few weeks I was approached by my current partner with the idea to form Dreamweaver, and after I researched the patent landscape and the technology and the market opportunity, I began to draft a business plan, and we started the company almost exactly two months after I was fired from Innegrity with nothing but an idea and Jim's good intuition. I put my nose to the grindstone and studied and ran experiments and tried to learn quickly what went on inside a battery under different conditions, and how it could be improved by making paper with nanofibers. I was way out of my element, but learned fast and within six months we had built a tiny little hearing aid battery that seemed to show some promise, so we started the process of raising money and building a real company.

Restraint in a Startup

Working with Jim is a dream for a young CEO (well, COO) like me. You see, when I walk into my closet to get dressed in the morning, I know what the wavelength is for each color and how colors mix to form other colors and why some materials shimmer and others flicker and others are bright and others dull--but I still have to ask my wife if a sweater matches my shirt.

Jim has a few phrases that he applies over and over, and I've noticed that they have more to do with what we choose not to do than with what we choose to do.

"If you lie down with dogs, you're bound to get fleas."

"Talk is cheap, but money buys the whiskey."

"Only a few things are going to ring the cash register."

By listening to Jim's advice, I am learning not to lay down with too many dogs, not to waste too much time with people who talk a lot but won't back up what they do with actions or money, and also not to spend too much time on stuff that has little chance of ringing the cash register. Here are a few practical examples:

Choose partners carefully: Jim and I discuss every new addition to the company, be they a supplier, customer, employee, manufacturing partner, test lab. Some we choose on technical ability alone, but most also have to fit our culture, to fit our bias for action and have the right expectations. It is arduous and we leave some good people behind, but it really is about finding the top few percent that will work, and leaving behind everyone who even has a hint of being an A- fit. Something that does not come easily to me, but that I'm learning, is leaving behind good technology in companies that are populated with people who won't execute.

Not all investors with money are good investors: We screen and screen and screen and in general have avoided most financial investors as being people who would not have a chance of understanding our business. Our supporters all have an operational background and understand the slow and arduous process of developing and commercializing a material that can be a real change agent in a "fast moving" market. Only a few financial investors have made the cut.

Delivering value to the customer is everything: We spend an inordinate amount of time, and I am flying and driving all over the world to really understand the intricacies of what our customers needs are and how their decisions are driven. It took almost two years for us to decide how to position our product (the lowest cost high technology battery separators in the world), and we are still exploring the dynamics of the process to get placements. This market is big, and we can make a lot of money in it, but first we had to learn with a high degree of precision what it is our customers value--what combination of product and service will make them part with their hard-earned money to include our product as a component of theirs.

Don't make any major decision until you have to: We didn't price our product until we were about to take an order. We still haven't priced our second product. We have resisted adding people to the board, adding advisors, choosing materials, deciding how to market in other regions. In each case, we are studying the market and the other options before deciding how to position ourselves. Every decision is made with the customers' best interests in mind, and so we gather and gather and gather information so we can make the decision that will serve the customer in the very best fashion.

I think it's clear, but I love working with Jim and his participation has helped give Dreamweaver a fighting chance of becoming one of the best new advanced materials companies in our industry.

Monday, December 31, 2012

As the family is packing up decorations from our month of celebrations, and the kids are upstairs playing in the play room, I am reminded how very blessed I am to be surrounded--literally surrounded on all sides--by such love and happiness. In this time of peace and thanksgiving, it is good to ponder on what things I should focus in the coming year. I have chosen three:

To be generous and kind

I am normally able to be generous with things. Mandi and I welcome others into our house frequently and we share what we have. I tend to do this on my own terms, though, and so I will look for the opportunities God may put in front of me to challenge the boundaries of our generosity.

One area where I can be quite stingy is with my time. While sometimes I give freely, it is often for my own purposes and I will also squander it purposelessly. Here I will focus on giving this precious gift from God freely to others wherever I am able to help.

Kindness is another story, and applies to me only sporadically. I admit I can be quite hard, and this is not what we are called to be. This doesn't necessarily mean I need to change the purpose of my actions--children still need to be punished, directions need to be given, negotiations finalized. Rather I should learn to do things in a kinder, more gentle way, giving my children and others who look to me an example worth following. I do not fully grasp the effect I have when I am too stern, and so this is a real opportunity to make changes that will have a lasting effect on the people I interact with, be they family, friends or business.

To do everything I can to put my family and the company I serve on firm financial footing.

God has been extraordinarily generous to me, taking care of me and my family through the downturn and through a change in employment that, because of it's timing, could have been quite tumultuous. He calls us to be responsible stewards of what we have been given, and I have stewardship responsibilities in both my family and business.

There is no disguising that this will require hard work and sacrifice, but if I do things right and follow the path that God teaches, it again is an opportunity to make changes and put structures in place that will have a lasting effect on my family, the company I serve and the people associated with it, be they employees, partners, investors, customers or suppliers. It is a time to de-risk both my family and the company.

To understand how agnostics and the early Christians came to their beliefs

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I read the Bible nearly every day, I teach my family, I go to church, I pray frequently...and yet there is in me a deep-seated independence that defies all efforts to harness it. I don't disbelieve God or anything He says--He has been too persistent in his love and tender care for me--but there is a rebellious nature in me that makes me occasionally throw down the shackles and run away, even if for just a little while. Sometimes I even get jealous of Him, and talk to and treat Him as an equal. This isn't right.

An equally strong and persistent urge has been a life-long search for the truth. It is what led me to God--He is "the Truth." I plan to make a study of how the early Christians came to their understanding of God, from first principles and early documents.

On the other side, the Bible clearly says that we cannot know God through human wisdom (1 Corinthians 1:20-23). There are some very smart people who seriously address the question of God and get stuck at exactly this point: they acknowledge His existence, but do not come to know Him. Are they turned off by the church and organized religion and so reject it in favor of a home-grown version? Can they not make a decision between the different religions? Is it just laziness? Fear that they might lose their self-primacy? Is it an absence of the Holy Spirit in their lives--were they not selected (Romans 9:24)? Other than the absence of the Holy Spirit, I have been in all of these places--perhaps agnosticism is simply the batter's box for Christianity? In any case, this is a question I intend to ponder this year.

I don't know if either of these will help tame the tiger within me, but I do believe some good will come of it.

Sunday, December 16, 2012

When I was twelve years old, I studied to be an expert at splitting wood. I studied the grain, the dryness, the number of knots. I placed the wedge where I thought it would split easiest, and tapped the wedge in, and even planned when I would snap my wrists while swinging the sledge, when I lifted with my legs and how I put my back into it. I rejoiced when the wedge sailed through cleanly.

Parents, do not deny your children the wonder of hard work. I did none of that willingly, but it taught me excellence and gave me trunk strength that made me the best 185 lb pulling guard in college football. :-)

There were times at Innegrity when I was startled by the excellence of the people around me. They had such skills and raw talent, could manage customers and make material and build parts. They made the company go!

The Nexus of Competence

We had a board member at Innegrity, a gentleman who had started at Milliken, then become CEO of a large textile company, the sold the company and moved on to get a PhD in business and become a professor of strategy. He captured strategic leadership in three words: Character, Competence and Community. When I asked what the leaders had to be competent at, he replied first that they should always continue to learn, to never be satisfied. I joked that academics could do that, so he then gave a definition that said they should learn a little of everything--operations, sales, product development, marketing... I challenged him again, "How much of this do I need to know, versus having a team that has that competence?"

Les is not someone who struggles with clarity, but we finished our conversation without a clear answer.

Often small companies are spread so thin that everyone is a front line contributor, and it's not uncommon to hear of leaders who are packing orders or cleaning bathrooms. Where they contribute isn't all that important, and I've seen leaders who were excellent technically, who were accountants, who had great organizational skills, or who were salespeople or marketers.

In a small company, people don't care what the leader can do, but the company will live and die on what they believe the leader can get done. They rely on the CEO to ensure that the product is designed perfectly, that the product is made flawlessly, that it is shipped on time and in good shape, that the company will be financially stable, that the investors will not interfere with the company's operations. The CEO is the one place they turn for all of this.

It is not enough for the leader to be believable. There are people who have the talent of being believable, but that will break down over time. Rather, the leader must actually ensure competence, and in time it will become believable. Causality here is very, very important.

This is the Nexus of Competence: a customer or investor or employee must be able to rely on the CEO to get things done. The CEO builds credibility by building a credible organization--but the credibility absolutely begins and ends with her. She has to make sure things happen as designed. This is a role the CEO cannot delegate. The trains must run on time, or the company will fail.

How it Breaks Down

It is clear that at the end of my time at Innegrity, the Nexus of Competence broke down. The environment was very difficult in 2009 and 2010, and the business was building more slowly than we had hoped. We went from one end-user at the beginning of 2009 (the Brawn Formula 1 team--now Mercedes) to 18 end-users at the end of 2009, and 60 when I left in November 2010. The last contract I signed was with Head Tennis Rackets, and both the first and last contracts produced world champions. But product sales had only brushed the underside of $1 million/year and were choppy and unpredictable. Most of the applications were small sporting goods applications--we had yet to land a big ballistic contract.

People were growing frustrated and looking over each other's shoulders. Our salespeople questioned the quality coming out of manufacturing. The manufacturing guys asked for a few sales accounts, thinking they could do better. A few investors became very active, questioning everything and calling for change.

The important point here is that the breakdown wasn't in the competence of the organization--there were a few mistakes, but the organization was producing a quality product, getting it into customers' hands and those customers were adopting it and launching new products at a very fast pace. The breakdown came when everyone questioned everyone else, when people's arrogance and pride helped them become "experts" in things they knew nothing about. The unknown became a source of paranoia that took hold like a virus.

The competence did not break down--rather it was a breakdown in the confidence that others had in that competence--a breakdown in the Nexus of Competence.

I describe one of my principle skills as a CEO as having a very deep keel. I don't get rattled by the rough seas, and can stay on path even as others waver. This confidence is contagious, and allows me to form the Nexus of Competence--I provide a vision, I solve problems, I help the team to function and to keep focused. Others believe in me and in the competence of the team, and the ship holds together. This comes with its requisite number of sleepless nights, early mornings and lots and lots of prayers.

My Personal Story

I am continually humbled by those who join when I start something new. It's not something I deserve or could force, and so much more gets done because these people join. Most of the time it happens in an informal "what are you working on," "oh, just this," "that sounds interesting" "it's great" "how can I help" conversation, which ends with someone else joining in and me going to bed thanking God for the people he has surrounded me with.

I hate that I was not able to hold Innegrity together at the end--that the same people who risked a lot to join began to question each other and, eventually, me. My only consolation is that, compared to what came after I left, we were a model of competence and efficiency. That does not alleviate the breakdown in confidence others had in the team under my watch. Now that I have been given a second chance, I am being ever so more careful and diligent to make sure that we both far exceed the competence of the last time, and also do not put ourselves into the risky situation that we were in before, with high costs and not enough revenue.

This puts me in an interesting predicament--my job is to ensure that everyone has confidence in the team. Yet I am already and continually humbled by the confidence already shown. So I work ten times as hard to help the team live up to their expectations to ensure that the confidence is not ill-placed.